UK-based Vodafone can afford Indian rival Reliance Jio

India may be a bright spot for a sluggish world economy, but it's the opposite for Vodafone. The UK mobile phone giant's business in Europe is growing slowly but surely. The market that makes up 12 percent of its revenue is in the middle of a price war, triggered by new entrant Jio. It will be a drag but Vodafone can afford to face off.Reuters | Updated: November 15, 2016, 20:42 IST

MADRID: India may be a bright spot for a sluggish world economy, but it's the opposite for Vodafone. The UK mobile phone giant's business in Europe is growing slowly but surely. The market that makes up 12 percent of its revenue is in the middle of a price war, triggered by new entrant Jio. It will be a drag but Vodafone can afford to face off.

The newcomer, backed by Indian billionaire Mukesh Ambani, has been offering superfast connectivity to customers until the end of the year. Cheaper prices and increased marketing spend could shave off up to 200 basis points from the EBITDA margin of the top 4 players, on estimates from Fitch. No wonder Vodafone has written 5 billion euros off the value of its Indian business, and delayed an initial public offering for the division.

Vodafone has injected capital into its Indian unit and outspent rivals in buying additional spectrum last month. That should eventually pay off: India's smartphone penetration is just 35 percent in a population of 1.3 billion. But in the short term, a price war means Vodafone may have to spend more without obviously enhanced returns.

The telecom group may therefore just scrape past its low-end target of growing EBITDA by 3 percent this year. That's not bad, considering Vodafone faces other profit-sappers, such as tougher roaming regulation. The mobile giant should generate enough cash to cover the dividend this year, but not other costs like purchasing spectrum. As long as Europe remains steady, as it is now, that is just about bearable.

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Vodafone on Nov. 15 said organic service revenue, a measure that excludes items like takeovers, handset sales, and foreign-exchange movements, grew 2.4 percent in the three months to Sept. 30 on the back of improvements in Europe. The UK mobile phone giant took a 5 billion euro impairment in its Indian business, driven by increased competition.

Service revenue grew 1 percent in the second quarter in Europe against the same period a year ago, above the 0.3 percent recorded in the previous quarter. EBITDA declined 1.7 percent in the first half of the year to 7.9 billion euros, mainly due to foreign-exchange movements, but grew 4.3 percent on an organic basis.

Vodafone slightly lowered the top of its full-year EBITDA guidance to 15.7 billion to 16.1 billion euros, implying a growth of 3 to 6 percent. It reiterated a target of free cashflow of at least 4 billion euros, before the impact of M&A, spectrum payments and restructuring costs.